Hong Kong Manufacturing SMEs: Preparing for the Future

98Cost Reduction StrategiesStrategies to deal directly with cost increases caninclude the following:• Improve efficiency within the factoriesImproving efficiency within the factories couldinvolve improving factory layouts, optimisingprocess flows, providing additional training forworkers, and improving management practices.Many SMEs could work to install modern cellularand team production processes, reduce thephysical footprint of activities, debottleneckprocess flows, and more sharply define worktasks for greater efficiency.• Automate production processesAutomating production processes is a way toreduce the overall labour content, reducingexposure to labour shortages and increasingwage rates. This can only be done if theprocesses can effectively be automated and ifthe capital required is not beyond the means ofthe SMEs. As labour becomes more expensiveand scarce, companies should identify laboursaving automation that would not have madesense in China in the past. This could includenot only automation of individual manufacturingoperations, but of materials handling andpackaging as well.• Improve efficiency in logistics, distributionand other activitiesImproving efficiency in logistics, distribution,and other activities can often reduce total costsmore than improvements in manufacturing.A comprehensive approach to cost reductionprovides the best opportunity to offset costincreases. Logistics and distribution costs are oftenhigher than actual production costs. SMEs shouldundertake an examination of their total costpicture, identify key cost elements (not just in theactual manufacturing), and develop cost controlstrategies in response.• Outsource business processesSMEs often face inefficiencies in businessprocesses, such as accounting, payroll, informationtechnology, warehousing, and others due to a lackof scale and specialised resources. Outsourcingsuch business processes can often lower the costsfor SMEs. In some cases, such services can bepurchased in bulk by groups of firms coordinatedby industry associations.• Relocate to other places in ChinaAs costs rise in the Pearl River Delta, manufacturingSMEs have the option to relocate production toother parts of China in which costs are lower. Thiscan only be done effectively if the relevant supplychains can be extended to the new locations andif the Hong Kong firms can manage farther afieldthan the PRD. SMEs should investigate wheresupply chains might support new productionlocations and should follow the moves of largecompanies that could bring their suppliers withthem if they relocate.• Relocate to other places in South orSoutheast AsiaRelocating to other countries, mostly probably inSouth or Southeast Asia can be another optionto combat rising costs in China. However, thiswill only be feasible if the infrastructure, supplychains, labour force, and regulatory environmentare suitable. Again, this also requires the HongKong firms to manage in a new environment thatmight not be as accessible as the PRD.• Relocate along with similar firmsMuch of the discussion of potential relocationof Hong Kong companies assumes that theymove as individual firms. In some industries,it might prove beneficial for groups of firmsto move simultaneously in order to ensurea critical mass exists in the new location toattract suitable suppliers. There are examplesof such group relocation in the Italian footwearindustry and in mobile handsets, where agroup of firms moved from Shenzhen toHuizhou with the support of the Huizhou and